Energy Efficient Home Improvement Credit
The Inflation Reduction Act is for individuals who make energy efficiency improvements to their homes. The energy efficient home improvement credit is a nonrefundable personal credit that can be claimed against ordinary income tax liability. For property placed in service after December 31, 2022, and before January 1, 2033, an individual may claim an energy efficient home improvement credit that is generally equal to 30% of the qualified expenses:
costs paid or incurred for installation of qualified energy efficiency improvements;
qualified residential energy property expenditures paid or incurred; and
amounts paid or incurred for home energy adults
However, several annual limits apply to the credit amount and property types, as discussed in the “Credit Amount” Section Below
Qualified improvements must be installed on or in connection with a home the taxpayer owns and uses as a residence. The credit is never available for a home the taxpayer does not use as a residence. For example, landlords cannot claim credit for rental properties they do not occupy. The credit applies only to qualifying expenditures incurred for an existing home, including additions and renovations, that is in the U.S. The credit does not apply to expenditures for a newly constructed home.
A taxpayer may rely on the manufacturer’s written certification that a product qualifies for the credit. A taxpayer without a manufacturer’s certification may qualify for the credit by showing that the property meets the required standards.
Credit Amount
Excess credits cannot be carried forward to the next tax year; thus, any credit that exceeds the taxpayer’s federal tax liability is lost. The amount of credit may be limited by:
annual aggregate credit limits,
annual limits for particular types of expenses, and
business use of the property.
Limits for Particular Expenses
Annual credits for the following types of expenses are limited to:
$600 for exterior windows and skylights;
$500 for all exterior doors, and $250 for any particular exterior door;
$600 for any item of qualifying energy property, other than pumps, stoves, or boilers listed under the Aggregate Credit section
$150 for home energy audits
Annual Aggregate Credit
The total annual credit is limited to:
$2,000 in the aggregate for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers; and
$1,200 in the aggregate for all other qualified expenses
Thus, a taxpayer’s total annual credit cannot exceed $3,200.
Business Use of Property
If less than 80% of the use of an item is for nonbusiness purposes, the credit is limited to the portion of the expenditures that is used for nonbusiness purposes.
For example, If the taxpayer uses 75% of the property as a residence and uses the other 25% as a home office or as a rental property, the credit is limited to the portion of the expenses that are used for the residential part of the property.
